Motion of Regret

Part of Non-Domestic Rating (Deferred Payments) (England) Regulations 2009 – in the House of Lords at 8:15 pm on 14 October 2009.

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Photo of Lord McKenzie of Luton Lord McKenzie of Luton Parliamentary Under-Secretary (also in the Department for Communities and Local Government), Department for Communities and Local Government, Parliamentary Under-Secretary (also in the Department for Communities and Local Government), Department for Work and Pensions, Parliamentary Under-Secretary (Department for Communities and Local Government) (also in Department for Work and Pensions), Parliamentary Under-Secretary (Department for Work and Pensions) (also in the Department for Communities and Local Government) 8:15, 14 October 2009

This is a fundamental point, which is why I disagree with the noble Lord. There was a change in the basis on which ports were generally assessed for rates, but it was not that which drove these backdated liabilities. The change indicated that there was a need for the valuation office to have more information, because it seemed that there were properties there that, under the old as well as the new system, should have been separately rated. That continues, whether or not we switch from the old to the new basis for ports generally. So it was not affected by that change.

Under the schedule of payments, ratepayers who meet certain criteria and are faced with unexpected significant backdated liabilities can repay the amounts over an unprecedented, interest-free eight years instead of as an immediate lump-sum payment. The scheme is providing real help to affected businesses by reducing the backdated amount to be paid up front by a huge 87 per cent. The Government are just as concerned as others about the impact of backdated rates liability on the trading prospects of businesses, including ports, particularly in the current economic conditions. We have explored and indeed debated at length the possible solutions put to us.

I will now try to deal with the whole raft of questions that were posed to me. If there are any I cannot cover tonight, I will certainly look at the record and write to noble Lords. The noble Lord, Lord Bates, asked why there was no impact assessment of backdating, no consultation and no assessment of economic assessment. There has been no change in rates policy, which is why there was no impact assessment. Backdating rates is an inherent part of the rating system and has been so for some long while.

The noble Lord asked whether we should accept the view of the House of Lords that there should be no principle for business rate supplement for retrospective backdated rates liability. The Government disagreed with the principle, as the purpose of backdating rates is so that all ratepayers pay a fair amount of rates from the date it should be rated and to ensure that there is no avoidance of rates. The noble Lord asked about a letter from Alan Johnson. I have not seen that letter.

The noble Lord had an assault on the VOA. The Government do not accept the blanket assertion that the Valuation Office Agency is to blame for this situation in what is a complicated position. The original assessments in the 2005 list were produced in good faith on the basis of information provided by the port operators and discussed between them, their professional advisers and the VOA. The separate assessments resulting from the port review are a result of additional information coming to the VOA's notice largely as a result of its own inquiries and with varying degrees of co-operation from the parties concerned. The Valuation Office Agency recognises that a number of businesses feel that they were not kept adequately informed and it will certainly look to improve communications in the event of any future such reviews. However, it wrote to all port operators in May 2006 and in that letter asked them to advise tenants whose contact details would not necessarily have been available to the VOA at the time that the review took place.

It has been suggested that prescription is the answer and that the Secretary of State should prescribe rates at the original 2005 level. First, as I said a moment ago, prescription will not change the person liable for the rates. Properties now separately rated will continue to be billed separately. Secondly, prescription cannot be done retrospectively, so prescribing rates now will not alleviate the backdated rates bill from 2005. Thirdly, the original 2005 level was in some cases zero, but some of the properties were omitted from the rating list. Prescribing rates at zero is effectively removing a liability for taxation and could therefore be construed as state aid. Fourthly, properties are rated on the basis of market rent levels. In order to deliver some benefit to businesses, we would need to prescribe a formula that generated results below the market rental value. However, none of the other 1.7 million properties on the business rating list is valued other than on the basis of market rent and there is no clear rationale for special treatment. In particular, there is no basis on which the low rateable value could be established.

The noble Lord, Lord Bates, asked what representations had been made from investors on the ports issue. I will write to the noble Lord on that matter. He also stated that one in every three valuations was in error and that out of 1,600 properties assessed, 600 were wrong. I suggest that that analysis is incorrect. Some 1,600 properties were identified and assessed on 1 April 2005. The review of ports found an additional 600 properties to be due and added to those 1,600.

I now revert to the point we touched on earlier—that we have received information that the Secretary of State does have powers to waive the retrospective element. As I said a moment ago, yesterday we received the briefing mentioned by the noble Lord, and we will have to look at that matter again and revert if necessary. However, the position as of today is as I have announced: the Government believe that primary legislation is necessary and those powers do not exist.

The noble Lord asked about whether there was time to review the VOA's conduct. A recent framework review of the VOA found that there was a communications issue, as highlighted by the ports review. The review recommended that proactive communications should be reviewed and improved. The DCLG and the VOA are looking to address that recommendation.

The noble Lord, Lord Bates, said that the Government had admitted that the VOA made an error. The Government have not admitted an error. The Government have agreed that the VOA had not communicated the review very well, but not that it was in error in the assessments that were undertaken.

In the exchange that we just had we dealt with the point made by the noble Lord, Lord Greaves, about the new systems introduced in 2005. The noble Lord also asked why we did not wait until the 2010 valuation to introduce these changes, as suggested by the Treasury Select Committee. To delay the findings of the review would effectively remove the liability for taxation, and the statutory framework for business rates gives no discretion to remove a liability to taxation. That is our advice. We believe that it would not be in the interests of fair competition or in line with the principles of taxation for such a liability to be waived.

The noble Earl, Lord Cathcart, referred to potential insolvency issues arising from these arrangements. A few affected businesses have said that, despite the schedule of payments, which represents an exceptional arrangement to spread payments over eight years, they will have to add this liability to their balance sheets and therefore become technically insolvent. As a result, although they may be in a position to continue their business, technically they will have to cease trading. We have taken advice on this matter from experts in the Insolvency Service and the Department for Business, Enterprise and Regulatory Reform, as it then was. Clearly the outcome will depend on the individual circumstances of each business on a case-by-case basis. It will depend on the level of both the existing assets and liabilities when the backdated rates bill was received, and the directors' reasonable expectations of being able to meet their liabilities as they fall due in the future.

Our correspondence with the Inspector General of the Insolvency Service indicated that liabilities would have to be booked immediately. However, he said that when an arrangement has been made to pay by instalments, companies can discount the liability, which will partly mitigate the impact by effectively reducing the amount shown on the balance sheet. He makes the distinction of a company being balance-sheet insolvent—which, of itself, would of course not necessarily cause a company to have to cease to trade—for as long as it was unable to pay its debts as and when they fell due. I think that that point needs to be seen in context.

I have dealt with most of the questions that have been raised. If any noble Lord thinks that I have not, I give them the opportunity of challenging me, but I will review the record and write further if necessary. To conclude, if the Government accepted the principle that the port occupiers should not pay their legally established rates liability, current secondary legislative powers would not be sufficient to achieve this aim. That is our advice. It is not reasonable to confer on any one particular sector an advantage over the others, which is what waiving the backdated liability for businesses in ports would do, were it even possible under the deferred payment scheme regulations, as this Motion of Regret suggests. It is right that businesses should pay the tax that is due, but in the current economic climate we must do all we can to support businesses with unexpected and significant backdated liability. We have done what we can, and we have done things for the first time by introducing the unprecedented eight-year schedule of payments. The Government have established that this will benefit up to 1,500 properties a year across England, both within and outside ports, and will help with cash-flow problems faced by some companies.

We have been around and around this issue. We cannot waive the liability under secondary legislation. We cannot even consider waiving the liability for a single sector. Ultimately, the most effective and immediate help that could be provided is already available via the schedule of payments. Therefore, I respectfully ask the noble Lord not to press his Motion of Regret.